Skip to main content

Full text of "ERISA oversight report of the Pension Task Force of the Subcommittee on Labor Standards"

See other formats


^4-.<~ J 6\ ' - cm ' /^° 



4-2 



7 I . cm-M 



94th Congress 
2d Session 



COMMITTEE PRINT 



ERISA OVERSIGHT REPORT 

OP THE 

PENSION TASK FORCE 

OP THE 

SUBCOMMITTEE ON LABOR STANDARDS 



COMMITTEE ON EDUCATION AND LABOR 
HOUSE OP REPRESENTATIVES 



>/>' 



///'"-«>> 



K$3WSK 






c is 







JUN 



IS77 






JANUARY 3, 1977 






Printed for the use of the Committee on Education and Labor 
CARL D. PERKINS, Chairman 



83-865 



U.S. GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1977 



COMMITTEE OX EDUCATION AXD LABOR 

CARL D. PERKINS, Kentucky, Chairman 



FRANK THOMPSON, JR., N- w 
JOHN H. DENT, Pennsylvania 
DOMINICK V. DANIELS, New Jersey 
JOHN BRADEMAS, Indiana 
JAMES O. O'HARA, Michigan 
AUGUSTUS F. HAWKINS, California 
WILLIAM D. FORD, Michigan 
PATSY T. MINK, Hawaii (on leave) 
LLOYD MEEDS, Washington 
PHILLIP BURTON, California 
JOSEPH M. GAYDOS, Pennsylvania 
WILLIAM (BILL) CLAY, Missouri 
SHIRLEY CHISHOLM, New York 
MARIO BIAGGI, New York 
IKE ANDREWS, North Carolina 
WILLIAM LEHMAN, Florida 
JAIME BENITEZ, Puerto Rico 
MICHAEL BLOUIN, Iowa 
ROBERT J. CORNELL, Wisconsin 
PAUL SIMON, Illinois 
EDWARD BEARD, Rhode Island 
LEO ZEFERETTI, New York 
GEORGE MILLER, California 
RONALD MOTTL. Ohio 
TIM HALL, Illinois 



ALBERT II. QTJTE, Minnesota 
JOHN M. ASIIBROOK, Ohio 
ALPHONZO BELL, California 
JOHN N. ERLENBORN, Illinois 
MARVIN L. ESCII, Michigan 
EDWIN D. ESHLEMAN, Pennsylvania 
PETER PEYSER, New York 
RONALD A. SARASIN, Connecticut 
JOHN BUCHANAN, Alabama 
JAMES M. JEFFORDS, Vermont 
LARRY PRESSLER, South Dakota 
WILLIAM F. GOODLING, Pennsylvania 
VIRGINIA SMITH, Nebraska 



Subcommittee ox La rob Standards 



JOHN H. DENT, Pennsylvania, Chairman 



DOMINICK V. DANIELS, New Jersey 
PHILLIP BURTON, California 
JOSEPH M. GAYDOS. Pennsylvania 
WILLIAM (BILL) CLAY, Missouri 
MARIO BIAGGI, New York 
JAIME BENITEZ, Puerto Rico 
LEO ZEFERETTI, New York 
GEORGE MILLER, California 
ROBERT J. CORNELL. Wisconsin 
PAUL SLMON, Illinois 
CARL D. PERKINS, Kentucky, 
Ex officio 



JOHN N.TERLENBORN, Illinois 
RONALD A. SARASIN, Connecticut 
JOHN M. ASHBROOK, Ohio 
ALPHONZO BELL, California 
WILLIAM F. GOODLING, Pennsylvania 
ALBERT H. QUIE, Minnesota 
Ex officio 



(II) 



INTRODUCTION 

The material that follows is an excerpt from the activity report of 
the Committee on Education and Labor for the 94th Congress. Except 
for minor technical changes, the material is the same as it appeared 
in the report of the full committee. 

(ni) 



Digitized by the Internet Archive 
in 2013 



http://archive.org/details/erisatreOOunit 



Pursuant to the directives of Rule X of the Rules of the House of 
Representatives and sections 3021 and 3022 of the Employee Retire- 
ment Income Security Act of 1974 (Public Law 93-406, hereinafter 
"ERISA"), the subcommittee held eight days of oversight hearings 
on the implementation of ERISA. In the course of these hearings, the 
ERISA experience to date was carefully and extensively explored. 
Both the successes and the shortcomings of ERISA, as well as ways in 
which the law could be improved, were noted by Members and wit- 
nesses. The confusion and inefficiency in plan operation caused by 
the division of administrative authority in the agencies were repeatedly 
mentioned. In addition to these formal hearings, the staff of the Pen- 
sion Task Force of this Subcommittee continuously monitored the 
implementation of the substantive provisions of the Act. 

It was apparent when ERISA was enacted that some of the complex 
legislative resolutions made in the course of the law's passage would, 
over time, prove less than perfect. Given the complexity of the sub- 
ject matter and the involvement of both the Tax and Labor Commit- 
tees, it was inevitable that parts of ERISA would need amending. 
The Subcommittee accepts its share of responsibility for these possible 
legislative misjudgments. The statutory changes which this Subcom- 
mittee has recommended and continues to recommend are made with 
an awareness of this responsibility. 

The principal focus of our activity has been in those areas of ERISA 
falling within the jurisdiction of the Subcommittee. In accordance with 
the Rules of the House, as memorialized in the rule adopted for con- 
sideration of H.R. 2 in the 93d Congress, 2d Session, the Committee 
on Education and Labor is charged with exclusive jurisdiction and 
oversight responsibility over Titles I and IV of the Act and retains 
joint jurisdiction over the matters in Title III. In the course of our 
hearings, we have endeavored to avoid intruding into that area of the 
Act (Title II) falling within the jurisdiction of the Committee on 
Ways and Means. Because of the dual statutory provisions for pro- 
hibited transactions, reporting and disclosure, and minimum stand- 
ards, our hearing record contains testimony dealing both with matters 
within our jurisdiction as well as the provisions of Title II. We found 
that as a practical matter, these issues do not confine themselves 
easily to the jurisdictional division provided in the Act. 

Our inability to restrict the scope of our oversight hearings to those 
elements of ERISA falling within the confines of Titles I, III, and IV 
is symptomatic of the experience recounted by every witness who ap- 
peared before us (including spokesmen for the Administration). No 
one who is affected by ERISA has been able to function in strict ac- 
cordance with the premise underlying its jurisdictional scheme. The 
substantive standards embodied in the Act are imposed as elements of 
tax policy and simultaneously as general social economic policy. The 
Internal Revenue Service is directed to implement the standards for 
revenue collection purposes and the Department of Labor and private 
citizens are authorized to enforce them as general social economic pol- 

(l) 



icy. As b practical matter these standards, while identical on their 
. produce different results in identical factual situations, depending 
on whether their enforcement and interpretation is designed to protect 
the federal revenue base or regulate the conditions of employment for 
the benefit of the participants. 

The untoward side effects of dual adminisl ration have been a con- 
stant and recurring theme in our hearing record, accompanied in many 
instances by an expressed desire to "make it work more effectively." 
• o us that the imperfections are a product of dual enforcement 
itself, rather than the means chosen to implement this policy. We have 
failed to reconcile the competing federal interests involved and the 
result has been the imposition of two largely inconsistent regulatory 
schemes over private employee benefit plans. The effect of this failure, 
aside from delays in implementation, resulting from the agencies' 
futile attempts to reconcile their differences, has been to subject 
these plans to a wrenching tu^-of-war as the agencies in good faith 
struggle to protect their legitimately perceived, but conflicting, 
interests. A fair reading of the record argues for a reappraisal of 
dual enforcement itself rather than further legislative efforts to 
"perfect" the division of the inherently indivisible. 

We are prepared to accept responsibility for our role in fashioning 
what is obviously an unworkable administrative arrangement. We are 
aware of the opinion that this situation results from the parochialism 
which infects both the agencies of government and private persons 
interested in the field of emplo}"ee benefit plans. This narrowness of 
viewpoint is at the same time a cause and an effect of the failure to 
precisely define the priorities in federal policy with respect to these 
plans. "We have for too long allowed these parochialisms to dominate 
our consideration of policy. 

Further analysis of the genesis of dual enforcement, beyond recogni- 
tion of its unworkability, would be fruitless. We shall therefore devote 
our efforts to an examination of the issues involved in any possible 
solution to this situation, for we are convinced that further considera- 
tion of ERISA's enforcement scheme will be needed. It is our inten- 
tion to direct the attention of the House and our colleagues in the other 
body to an analysis of the underlying issues involved. As we perceive 
the matter, several issues are paramount. 

First, the question of the nature of the Federal interest in employee 
benefit plans needs to be evaluated. The framework of ERISA leaves 
unresolved the competing revenue and social economic considerations 
in federal policy. The historic federal preoccupation with these plans 
as potential sources of revenue (or, more accurately, revenue losses) 
has not been disturbed by the Act. At the same time a comprehensive 
scheme of social economic reform in the form of a body of contractual 
and trust law governing the rights of the private parties involved has 
been enacted into federal law. The result has been statutory and ad- 
ministrative confusion and ambiguity. 

The symptons of the defect are already serious. Moreover, private 
party and Department of Labor initiated litigation will shortly add 
a new and potentially dangerous dimension to the problem. At the 
moment, the adverse effects are localized in the administrative 
activities of the agencies. .V- the federal court system becomes active in 
private litigation under Title I, the conflicts will, in our view, become 
more and more troublesome. These cases will be resolved within the 



context of Title I under its equity-oriented principles of law. Assum- 
ing, as we do, that substantial variations from the Internal Revenue 
Service's interpretation of the Title II standards will be adopted by 
the courts, the results may be chaotic. 

Our concern is founded on our conviction that the courts charged 
with adjudicating actions undertaken by private parties will view 
ERISA (especially Title I) as having created a series of obligations 
owed by plans and plan fiduciaries to the plan participants and bene- 
ficiaries. It is likely that these courts, hearing cases in which aggrieved 
participants are attempting to assert rights established under Title I, 
will construe the ERISA duties and standards liberally in favor of 
those plaintiff-participants who are the beneficiaries of the protective 
provisions of the Act. The nature of the rights created and the causes 
of action that will arise as plan participants seek to vindicate those 
rights require that courts view both the statute and the remedies for 
breaches with the creativity and flexibility that is inherent in any 
equity-oriented action. It is apparent that this flexibility will in some 
instances create a tension with the recognized and letigimate need 
in tax administration for uniformity and precision. Conflicts in inter- 
pretation are bound to arise as the same provisions in ERISA are 
analyzed in both a proceeding in which a tax provision is at issue and 
a proceeding in which a participant's entitlement or a fiduciaiy's 
conduct is at issue. 

With respect to the inconsistent or conflicting interpretations that 
may result, the Act is silent. We do not read Title I to support in any 
way the proposition that the interests of participants are to be sub- 
ordinated to the interests of the revenue agency. And we see little 
likelihood that those charged with enforcing the Internal Revenue 
Code will voluntarily subordinate their enforcement policies to inter- 
pretations fashioned by courts more concerned with equitable 
considerations. 

We can only be hopeful that the administrative agencies and the 
courts will successfully balance the participant interests and the reve- 
nue interests as these conflicts and tensions develop. The Act, in its 
silence on this important and extremely difficult issue, contemplates 
such a balancing of the wholly legitimate, but frequently differing, 
needs and perspectives. Only with such a balancing of interests can the 
participant rights established in Title I and the revenue interests 
recognized in Title II be achieved. Since the administrative and judicial 
forums have failed successfully to resolve these competing participant 
and revenue interests, then the Congress must of necessity actively 
address the issue and legislatively achieve the balancing of interests 
it has only implicitly addressed to date. 

Fiduciary Standards 

In the course of our oversight activities we have been inundated 
with testimony and comments about the fiduciary standards pro- 
visions of the Act and their implementation. For the purposes of 
this report we have identified four provisions in the act which appear 
to be the principal areas of attention. 

/. Prohibited Transactions — Section 406 

In general, Title I of the Act asserts jurisdiction over plans and 
fiduciaries and all of its standards are limited in their effect to persons 



and entities falling within the Boope of those two defined terms. 
Within the context of the "iiduciary standards" of ERISA, any per- 
son who i> not a iiduciary but who is a party in interest or, more 
Eroperly. a "disqualified person' 1 escapes the jurisdiction of Title I 
at is subject to the more limited ''fiduciary standards" of Title II. 

Part 4 of Title J contains a variety of provisions which in toto are 
referred to as the ''Fiduciary Standards." Among these provisions are 
the prohibitions imposed on fiduciaries against dealing with parties 
in interest in section 406(a) and against self-dealing contained in sec- 
tion 406(b). Both of these subsections are restricted in their scope to 
enjoining activity by a fiduciary. As a general comment we have 
observed little adverse reaction to the policy of barring self-dealing 
as articulated in section 406(b). The outright bar to "party in interest" 
dealings in section 406(a) is another matter. 

The advocates of the section 406(a) prohibitions base their policy 
preference on the relative ease of proving a fiduciary violation under 
this provision, in contrast to the more extensive proof required under 
section 404. This section (section 406) embodies what is characterized 
as the "prophylactic approach," in that a broad range of conduct is 
prohibited, without regard to the individual bona fides of the specific 
transactions or relationships involved. Obviously the burden of 
enforcement is greatly reduced in any action proceeding under section 
406. The moving party need demonstrate only the existence of a trans- 
action or relationship falling within the scope of the prohibition and 
the absence of an applicable exemption. In contrast, an action brought 
under section 404 will require a showing of imprudence or violation of 
the exclusive benefit standard, a somewhat more difficult and cer- 
tainly less objective burden of proof. 

A further rationale is preferred for these prohibitions : certain trans- 
actions and relationships offer such a potential for abuse that they 
must be prohibited per se, unless after review, an agency can deter- 
mine that no risk of abuse exists. 

Of these two "arguments" the first represents little more than a 
statement of the objectives of the proponents. In response we feel com- 
pelled to adopt the view that the federal interest in easing its admin- 
istrative burdens, by itself, cannot justify the adoption of unnecessarily 
restrictive policies. The degree of control exercised over the activities 
of a private citizen must be measured against the benefits to be de- 
rived for all citizens. On the basis of our hearing record and the ex- 
perience of the Department of Labor to date, it would appear that the 
prohibitions in section 406(a) are overly broad. The number of innocent 
and nonabusive transactions and relationships caught within section 
406(a) far exceed those with abusive or pernicious overtones. The pro- 
phylaxis as it applies to party in interest transactions is overly broad. 

In fairness it should be noted that section 408 of the Act does provide 
a mechanism for obtaining administrative exemptions from the prohi- 
bitions. At this time the Department of Labor has received almost 500 
exemption requests and has processed slightly more than 10% of these. 
The agency's backlog has been growing at an increasing rate over the 
past two years. All indications are that it will continue to grow and 
the Department will fall further behind in its attempts to keep pace 
with this volume. 

In view of the Department's inability to provide timely relief for 
innocent parties caught up in the section 406(a) snare and the exces- 



sive breadth of these provisions, we continue to support the amend- 
ments proposed in H.R. 7597 as reported by the Committee on Edu- 
cation and Labor in 1975. 

77. Cofiduciary Liability 

As a general proposition the duties of a fiduciary under ERISA 
are the same as those imposed on one in a position of trust under the 
common law. In certain instances the Act has departed significantly 
from the common law approach. One of these departures is contained 
in section 405 and represents a dramatic change in the obligations of 
individual fiduciaries to oversee the activities of others serving in simi- 
lar capacities. While there is some uncertainty as to the interpretation 
of the section, it would appear that its purpose is to require some level 
of oversight and supervision of each other by all fiduciaries. 

Given the broad definition of "fiduciary" for Title I purposes and 
the absence of an affinity bond between all the fiduciaries of any plan, 
such a general requirement appears inappropriate. As the full Com- 
mittee indicated in its report accompanying H.R. 7597 (House 
Report 94-646, 94th Congress, 1st Session), the policy of section 405 
needs to be changed to restrict the obligation of supervision and over- 
sight to those who hold official positions of authority. The need for 
this revision will become still more acute if courts, as may be expected, 
interpret the "knowledge" requirement necessary to establish co- 
fiduciary liability under section 405 (a) in a manner consistent with the 
interpretation of the term "knowledge" adopted by the draftsmen in 
the comment to section 297 of the Restatement of Trusts 2d: 

"A third person has notice of a breach of trust not only when he 
knows of the breach, but also when he should know of it ; that is when 
he knows facts which under the circumstances would lead a reasonably 
intelligent and diligent person to inquire whether the trustee is a 
trustee and whether he is committing a breach of trust, and if such 
inquiry when pursued with reasonable intelligence and diligence would 
give him knowledge or reason to know that the trustee is committing a 
breach of trust." — Restatement of Trusts 2d, comment to section 297. 

The presence of section 405(a), in conjunction with the widely held 
view that this subsection will be interpreted expansively, has created 
in many skilled and dedicated persons a feeling of excessive caution 
and reluctance to assume a fiduciary status. This sentiment, we be- 
lieve, is on balance detrimental to the interests of plan participants 
and plan sponsors. Accordingly, it is felt that a statutory change in 
section 405, making clear that fiduciaries have only a limited duty to 
oversee the activities of their co-fiduciaries, is necessary. 

III. Definition of Fiduciary 

A recent court decision, Hlbernia Bank v. International Brotherhood 
of Teamsters, Chauffers, Warehousemen and Helpers of America, 411 
F. Supp. 478 (N.D. Cal. 1976), purports to narrow the definition of a 
fiduciary by reading "discretionary" in the clause "... any authority 
or control respecting management or disposition of its assets," thereby 
excluding asset custodians. 

Additionally, the Department of Labor seems inclined to adopt a 
similar view in its development of interpretive standards and regula- 
tions under part 4. We believe that their efforts are designed to limit 
the impact of the prohibitions in section 406, and the obligations 



arising under section 405, to a narrower group and thereby limit the 
dislocation created by these provisions. VVe strongly believe that the 
jurisdictional foundation of ERISA, based on the existence of the 
fiduciary status, should not be altered by administrative fiat. 

We arc acutely aware of the extreme breadth of the definition of 
fiduciary. As we have already noted, some advocate restriction of its 
scope >lution to the problems arising under sections 405 and 406. 

Unfortunately the effect of such a limitation also restricts the scope 
of section 404 and affects the preemption scheme in section 514. In our 
view, whatever problems exist in the prohibited transaction and co- 
fiduciary provisions should be solved narrowly in the context of 
sections 405 and 406. 

We continue to support the amendment proposed in H.R. 7597 to 
provide that a director, officer, or employee of a corporation or em- 
ployee organization winch itself is a fiduciary with respect to a plan 
shall not themselves be deemed to be fiduciaries solely on account of 
actions undertaken by them in their capacities as directors, officers, or 
employees. In short, we believe ERISA should recognize the ''cor- 
porate shell" for liability purposes with respect to actions under- 
taken by individuals in the course of their employment. 

IV. Prudence, Sole Interest, and Exclusive Purpose — Section 404- 

Section 404 of the Act, in part, establishes the general duty of care 
required of all who serve in an ERISA fiduciary capacity (the "pru- 
dence" requirement). Additionally, this section limits the objectives 
which may motivate fiduciaries' actions to those "solely in the interest 
of participants and beneficiaries" and then further limits their ac- 
tivities to those which are "for the exclusive purpose of . . . providing 
benefits to participants and their beneficiaries; and . . . defraying rea- 
sonable expenses of administering the plan. ..." 

These requirements have an extensive history in the common law 
of trusts as developed over the past two hundred years. The prudence 
requirement embodies a standard for actions of a fiduciary which 
purports to be completely objective, but there will always be a sub- 
jective element in its application, arising from the wisdom of hind- 
sight. By contrast, the sole interest and exclusive purpose require- 
ments compel an examination into the subjective state of mind of the 
fiduciary. His motivation in acting (or failing to act) itself becomes 
the focus of critical review. It is a settled principle of trust law, fol- 
lowed in ERISA, that an otherwise prudent action, undertaken for 
an improper purpose, wall taint the action and render the fiduciary 
liable for surcharge (see Blankenship v. Boyle, 329 F. Supp. 1089 
(D.D.C. 1971). 

We are convinced that this requirement remains an appropriate 
standard to impose on persons charged with fiduciary obligations. It 
has been a precept of our policy with regard to employee benefit funds 
that they are owned by their participants. The overriding purpose of 
Title I is the preservation of their collective interests and the equitable 
resolution of competing participant interests. The requirement of un- 
swerving loyalty to their interests is the single most important char- 
acteristic of fiduciary office and the capstone of this policy. 

In contrast to our view, we find a bod} 7 of opinion holding that these 
plans should serve unrelated social economic policies. Some have 



suggested that tiie&e plans be tapped to allocate capital to marginal 
stock issues; others advocate allocation to the housing market and 
still others that these assets be made available to finance employers 
capital expansion in return for stock ownership. We are sympathetic 
to the objectives sought to be accomplished. However, we find our- 
selves unable to endorse any proposal which advocates relaxation of 
the protective standards granted participants under the standards in 
section 404. 

Vesting Discrimination 

The Subcommittee is required to report on experience under ERISA 
with a view to determining whether any of the three statutory vesting 
provisions provide an opportunity for discrimination. Because the 
effective date of the vesting provisions of the Act did not occur until 
1976 for the vast majority of plans, and, to a lesser extent, because the 
agencies have been unable to develop necessary regulations in a timely 
fashion, few plans have entered the qualification process. Addition- 
ally, delays in promulgating reporting regulations led the Depart- 
ment of Labor to defer reporting deadlines. As a result, we have no 
meaningful data to determine utilization patterns of the three stand- 
ards, nor are we in any position to assess the actual impact of each 
of these standards "in place" under actual operating conditions. 

However, we have analyzed the standards themselves and are of the 
opinion that their vesting effects are sufficiently similar under the 
statutory scheme to eliminate any substantial threat of "standard 
shopping" to disadvantage participants. 

Portability 

Even though no federal mandatory portability scheme has been 
enacted, we have continued to monitor this issue in the normal course 
of our oversight activities. We must admit that no progress has been 
made in the past two years in developing a feasible approach to 
implement mandatory inter-plan asset or liability transfers. As we 
view portability, it remains in the category of an idea, which, in 
abstract, possesses substantial superficial appeal. However, when 
analyzed in the specific, the enormous expense and marginal utility 
of the programs become apparent. 

As we have indicated in previous reports, the principal purpose of 
any portability scheme, preservation of benefit credits, is largely 
achieved by a sound vesting program. As a protective scheme, porta- 
bility expands on the rights granted by a vesting standard only to the 
extent that physical transportation of assets, from one plan to another, 
benefits the participant involved. It is our finding that such asset 
movement is of no more than marginal advantage to participants and 
may, because of the mechanics of any such scheme, actually work to 
their detriment. 

Mandatory portability, as distinguished from vesting, requires that 
participants be given the right to transfer the present value of their 
vested pension credits upon termination of coverage. The computation 
of present value at termination will require that the competing in- 
terests of those remaining in the plan and the withdrawing partici- 
pant be reconciled on an equitable basis. In particular, the question 
of appropriate interest rate assumptions presents enormous practical 
problems in the context of these competing interests. 



8 

Additionally, the loss of mortality experience, by reason of with- 
drawal of the current pen-ion credits, will require a significant adjust- 
ment in the present value of the withdrawing participant's benefit 
credits. This adjustment will be necessary to avoid possible disadvan- 
tage to the remaining participants, but will result in substantial in- 
equities for some withdrawing participants and unjustified windfalls 
for othe. 

We are reluctant to confess our inability to fashion workable pro- 
posals to implement an idea with as much surface appeal as portability. 
However attractive the concept may be, we feel compelled, on the basis 
of our analysis, to take the position that the practical barriers to its 
implementation on an equitable basis have not been overcome. 

Termination Insurance and Small Employers 

We are also instructed under section 3022 of ERISA to review 
the treatment of small employers under Title IV, Plan Termination 
Insurance. 

The Congress, in Title IV, declined to distinguish small employer 
defined benefit plans from the treatment afforded defined benefit plans 
in general. The only exception to this policy judgment was the exclu- 
sion from coverage of plans of professional service employers with 
le^s than 25 participants since the date of enactment. 

The Subcommittee believes this policy judgment regarding small 
plans and termination insurance should not be disturbed. Except in 
the professional service employer context, we have not become aware of 
any Title IV provisions affecting small employers, the Pension Benefit 
Guaranty Corporation, or small plan participants, in such a way to 
warrant separate Title IV treatment for small plans. Further, it is 
expected that the Corporation's required development by September 2, 
1977 of a contingent liability insurance program, partial or complete, 
voluntary or mandatory, or some program combining these possible 
features, will substantially lessen the concerns expressed by defined 
benefit plan sponsors of all sizes. 

Preemption 

ERISA, among its many provisions, provides for a significant ad- 
justment in the regulatory roles of state and federal authority with 
respect to the various elements of the employee benefit plan field. The 
provisions of section 514 expressly reserve to Federal authority the 
regulation of employee benefit plans subject to the jurisdiction of the 
Act. In electing deliberately to preclude state authority over these 
plans, Congress acted to insure uniformity of regulation with respect 
to their activities. There was a recognition of the necessity for the 
preservation of some state activity in this field and certain limited 
exceptions were made to the broad preemption scheme. In general 
these exemptions are designed to save state law as it is applied to en- 
tities which are not employee benefit plans as defined in section 4(a) 
and not exempt under section 4(b), to the extent that such regulation 
does not relate to employee benefit plans. 

From the early 1970's, the legislative activities which eventually pro- 
duced ERISA involved various framings of preemption schemes. The 
Subcommittee's hearing record prior to 1974 contains numerous 
discussions of the propriety of one approach or another. Once it had 
become clear that our policy would be the creation of uniform na- 



9 

tional standards, the problem was to extract these plans from the 
regulatory schemes in the several states without creating untoward 
side effects. 

A number of states had undertaken to regulate employee benefit 
plans as such; others had already made, or appeared ready to declare, 
these plans subject to state control as insurers, trust companies, or in- 
vestment companies. From a drafting standpoint the difficulty arose 
in attempting to extricate these plans from the framework of state 
insurance, trust and securities regulation even though their activities 
might very well bring them within the sphere of conduct historically 
subject to such regulation. On the one hand it was clear that the plans 
subject to ERISA needed to be freed of the possibility of state regula- 
tion; on the other, it was important to limit the effects of preemption, 
in order to avoid disrupting state efforts to regulate the conduct of 
other financial entities not subject to the federal Act. 

This was accomplished by articulating a broad intention to preempt: 

"Except as provided in subsection (b) of this section, the provisions 
of this title and title IV shall supersede any and all State laws insofar 
as they may now or hereafter relate to any employee benefit plan de- 
scribed in section 4(a) and not exempt under section 4(b)." (ERISA; 
section 514(a)) 

It is our understanding of this language that, with respect to regula- 
tion of the activities of certain employee benefit plans (those subject 
to ERISA jurisdiction), federal authority has been expressly extended 
to occupy the field to the exclusion of state authority, subject to cer- 
tain exceptions. These exceptions are designed to delineate affirma- 
tively the limits of the "field" preempted by section 514(a), and 
articulate a second, but distinctly subordinate, policy within the 
section of preserving state authority insofar as it does not relate to 
any plan ". . . described in section 4(a) and not exempt under sec- 
tion 4(b)." 

Based on our examination of the effects of section 514, it is our 
judgment that the legislative scheme of ERISA is sufficiently broad 
to leave no room for effective state regulation within the field pre- 
empted. Similarly it is our finding that the Federal interest and the 
need for national uniformity are so great that enforcement of state 
regulation should be precluded. 

Accordingly, it is our belief that the general policy of section 514 
(a), excluding state regulation relating to ERISA covered plans, 
should not be disturbed. However, it may be necessary to narrow the 
exceptions to this policy which are described in Section 514(b). It 
has come to our attention that our efforts to ensure minimum dis- 
ruption of the regulatory efforts of the states in the fields of 
insurance, banking and securities, generally are being construed 
as a reservation of state authority over employee benefit plans 
themselves. The argument is predicated on an interpretation of 
the language ". . . shall be deemed . . ." as used in section 514 
(b) (2) (B) to limit the scope of the prohibition contained therein to the 
use by State authority of a legal fiction to declare a plan to be insur- 
ance, or a trust company, etc., where it is not. As this line of reason- 
ing goes, those plans which actually contain the characteristics of 
insurance, etc., would then remain subject to state regulation. 

Such interpretation, while artful, is not supported by a fair reading 
of the statute and legislative history. Faced with the conflicting and 



BO 

uncertain basis for regulation among the Mates the "deemed* 1 lan- 
guage was utilized to create an irrebuttable presumption that these 

plans are not insurance, trust companies, etc., for purposes of state 

regulation. As a drafting technique the "deemed" is u^ed in section 
514(h) not to bar the use of a legal fiction by the states but tocreate 
what may amount to a legal fiction in a given circumstance. The ir- 
rebuttable presumption would not be overcome even if an employee 
benefit plan engages in activities which bring it within the insurance, 
trust, or securities activities generally regulated by a state. 

Some have questioned the effect of the language of section 514(c) 
insofar as it appears to them to limit the preemptive effect of section 
514(a). Their reasoning appears to be that the state action preempted 
and the field protected are narrowly restricted by this subsection's 
definition of "State" and use of the phrase "terms and conditions." 
We are impressed with the artfulness and tenacity of those who hold 
to this view, but our reading of this provision leads us to a contrary 
result. The clause beginning "which purports to regulate" modifies 
only "any agency or instrumentality . . ." and not "state" and 
"political subdivision thereof." Additionally, the phrase "terms and 
conditions" as used in this section, as elsewhere in ERISA, has a very 
broad scope and is not properly limited to any narrow meaning that 
may be ascribed to it under common usage in the insurance field. Ac- 
cordingly, any activity by a state or political subdivision thereof, which 
relates to employee benefit plans, qua benefit plans, is preempted by 
section 514(a). 

However, should our understanding of the language in section 
514, when read in conjunction with the legislative history, not prove 
correct or desirable, then of course further congressional action would 
be necessary to protect the policy in section 514(a).' 

It has come to our attention, through the good offices, of the Na- 
tional Association of State Insurance Commissioners, that certain 
entrepreneurs have undertaken to market insurance products to em- 
ployers and employees at large, claiming these products to be ERISA 
covered plans. For instance, persons whose primary interest is in 
profiting from the provision of administrative services are establish- 
ing insurance companies and related enterprises. The entrepreneur 
will then argue that his enterprise is an ERISA benefit plan which is 
protected, under ERISA's preemption provision, from state regula- 
tion. We are concerned with this type of development, but on the 
basis of the facts provided us, we are of the opinion that these pro- 
grams are not "employee benefit plans" as defined in Section 3(3). 
As described to us, these plans are established and maintained by 
entrepreneurs for the purpose of marketing insurance products or 
services to others. They are not established or maintained by the 
appropriate parties to confer ERISA jurisdiction, nor is the purpose 
for their establishment or maintenance appropriate to meet the 
jurisdictional prerequisites of the Act. They are no more ERISA 
plans than is any other insurance policy sold to an employee benefit 
plan. 

To the extent that such programs fail to meet the definition of an 
"employee benefit plan," state regulation of them is not preempted 
by section 514, even though such state action is barred with respect 
to the plans which purchase these "products." 



11 

We remain convinced of the propriety and necessity for the very 
broad preemption policy contained in section 514. To the extent that 
the scheme of regulation is found to be deficient with respect to some 
or all of the plans covered by the Act, we are prepared to consider 
amendments expanding or modifying the federal standards. We will 
be most reluctant to consider any remedy involving a limitation on the 
preemptive scheme as it applies to the plans described in section 3(3) 
of Title I. 

We are mindful of the potentially harmful effects of an overly broad 
interpretation of the term "employee benefit plan" when coupled with 
the policy of section 514. As we have already noted, we do not believe 
that the statute and legislative history will support the inclusion of 
what amounts to commercial products within the umbrella of the def- 
inition. Where a "plan" is, in effect, an entrepreneurial venture, it is 
outside the policy of section 514 for reasons we have already stated. 
In short, to be properly characterized as an ERISA employee benefit 
plan, a plan must satisfy the definitional requirement of section 3(3) 
in both form and substance. We must earnestly encourage private per- 
sons, in particular the membership of the National Association of 
State Insurance Commissioners, and urge the Department of Labor 
to take appropriate action to prevent the continued wrongful avoid- 
ance of proper state regulation by these entities. 

o 






UNIVERSITY OF FLORIDA 

mi ii mill mi ii ii 



3 1262 09113 4162